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1 Direct Tax Rulings Impacted / overruled by Finance Bill 2017 Finance Bill, 2017 has proposed over 75 amendments to the existing Income-tax Act. The Bill proposes some amendments, which could have the effect of overruling quite a few Court and Tribunal decisions.taxsutra.com has compiled a list of case-laws that are likely to be impacted / overruled if the amendments take effect. Sr. 1. Clarifications relating to Indirect transfer provisions It is proposed that indirect transfer provision shall not apply to Foreign Institutional Investor ( FII ) and Category-I/Category II Foreign Portfolio Investors ( FPI ) CBDT vide Circular 41/2016 clarified on indirect transfer provision applicability to FPIs/FIIs. The circular has subsequently been kept on hold by the CBDT. 2. The proposed amendment is clarificatory in nature. Amendment will take effect retrospectively from April 1, Reason to believe to conduct a search, etc. not to be disclosed It is proposed to insert an Explanation to sub-section (1) and to sub-section (1A) of section 132 and to sub-section (1) of section 132A to declare that the 'reason to believe' or 'reason to suspect', as the case may be, shall not be disclosed to any person or any authority or the Appellate Tribunal Confirmed: Spacewood Furnishers Pvt. Ltd.[TS-266-SC-2015] SC held that reasons recorded prior to authorizing search need not to be disclosed or communicated to the person against whom the warrant of authorization is issued. No right is conferred on taxpayer of inspection of documents or to a communication of the reasons for the belief at the stage of issuing of the authorization. SC observed that"any such view would be counterproductive of the entire exercise contemplated by Section 132 of the Act" and material may be disclosed only at the stage of commencement of the assessment after search is completed. (Input provided by Taxsutra reader, Mr. Malay Chaturvedi (GM, Tax, M3M India Pvt. Ltd.) Shri Parma Ram Bhakar[TS-515-ITAT-2013(JODH)] ITAT held in this case that competent authority u/s 132(1) should have "reason to believe" to authorise conduct of search u/s132(1). Further held, search conducted under authorization issued in absence of Page 1

2 reasons, was invalid. Also, ITAT opined that authorization to conduct search based on reason u/s 132(1) did not exist, so search was held to be invalid. Consequently, assessment order based on invalid search was quashed. Ess Dee Aluminium Ltd and Etc [TS-625-SC-2016] SC held that CIT(A) is empowered to examine the validity of search operations carried out u/s 132. HC for this case, had dismissed assessee s writ challenging the assessment framed u/s 153 pursuant to search operations, with liberty to raise all contentions before the appellate authorities under the Act. Assessee s stand that CIT(A) had no jurisdiction u/s 246A to examine the validity of the search operations carried u/s 132 was rejected. SC opined that if the assessment order which is based on the search operations is under challenge, the validity of the search proceedings can also be gone into by the Commissioner of Income Tax (Appeals). (Input provided by Taxsutra reader, Mr. Malay Chaturvedi (GM,Tax, M3M India Pvt. Ltd.) Harbhajan Singh Chadha And Others[TS-39-HC- 2015(ALL)] HC had pointed out that search was carried out at petitioner s premises pursuant to the warrant of authorization issued in name of other co-owner and HC had held that petitioners' cannot allege that there was no "information" or "reasons to believe" warranting the issuance of the warrant of authorisation under Section 132 of the Act since the petitioners' name was not mentioned in the warrant of authorisation. Page 2

3 3. LTCG u/s 10(38) exemption available only if share purchase suffered STT It is proposed to amend Sec 10(38) to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share was chargeable to STT. However, to protect the exemption for genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company acquisition by non-resident in accordance with FDI policy of the Government etc., it is also proposed to notify transfers for which the condition of chargeability to STT on acquisition shall not be applicable. 4. Substitution of prescribed FMV on share transfer, to be full value of consideration It is proposed to insert a new Sec 50CA to provide that where consideration for transfer of share of a company (other than quoted share) is less than the Fair Market Value (FMV) of such share, the FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head "Capital gains". 5. Clarifying MAT applicability on companies preparing financials under IND-AS It is proposed to amend Sec 115JB so as to provide the framework for computation of book profit for Ind AS compliant companies in the year of adoption and thereafter. 6. Clarity of procedure in respect of change or modifications of object in case of entities exempt under sections 11 and 12 UdayPunj [TS-400-SC-2013] SC dismissed SLP filled by UdayPunj against Delhi HC judgment wherein Delhi HC had held that sale of shares by promoter during IPO, based on provisional approval from recognized Stock Exchanges but before listing, not entitled to capital gains tax relief since no Securities Transaction Tax (STT) have been paid. Ramesh Kumar Jain (HUF) vs DCIT [TS-5585-ITAT- 2013(Jodhpur)-O] Jodhpur ITAT held that where assessee produced proof of purchase and sale of shares and genuineness of sale of shares was established from stock exchange, exemption u/s 10(38) on long-term capital gains from such shares could not be denied. Dy. CIT vs. Dr RajanPai[TS-5468-ITAT- 2016(BANGALORE)-O] Bangalore ITAT ruled that fair Market value of bonus shares cannot be taxed u/s 56(2)(vii)(c) by considering them as shares received without payment of consideration. HC ruled in favour of assessee and held that bonus shares are not received free or for a lesser fair market value, a consideration has flown out from the holder of the shares in the form of depression in the intrinsic value of the original shares held by him CBDT in its reports (first report dated March 18 th, 2016and second report dated July 23 rd 2016) had suggested framework for computation of book profit for the purposes of Minimum Alternate Tax ( MAT ) u/s 115JB of the Act for Indian Accounting Standards ( Ind AS ) compliant companies. Confirmed: BCCI [TS-251-ITAT-2012(MUM)-O]: Page 3

4 It has been proposed that the registration of trust will have to be done afresh if the objects of the trust are modified by the assessee and where the objects which do not conform to the conditions of registration. The application for fresh registration needs to be made within a period of thirty days from the date of such adoption or modifications of the objects. The proposal has been made in light of lack of clarity in respect of fresh registration where existing registration has been cancelled. 7. Interest on refund due to deductor Mumbai ITAT ruled that when a registration is validly held by a trust or institution, if there are changes to the by-laws or objects of the trust, assessee should approach the registering authority again; It was also held that benefits flowing therefrom, cannot be extended to the amended objects of the society unless the DIT examines the same and comes to a conclusion that the registration under section 12A, can be extended to the revised objects, memorandum and bylaws. Confirmed: It is proposed to insert a new subsection (1B) to Sec. 244A to provide that where refund of any amount becomes due to the deductor, such person shall be entitled to receive, in addition to the refund, simple interest on such refund, 0.5% for every month or part of a month comprised in the period, from the date on which claim for refund is made in the prescribed form or in case of an order passed in appeal, from the date on which the tax is paid, to the date on which refund is granted. It is also proposed to provide that the interest shall not be allowed for the period for which the delay in the proceedings resulting in the refund is attributable to the deductor. Amendment will take effect from April 1, Sunflag Iron And Steel Co Ltd [TS-5160-HC- 2016(BOMBAY)-O] : Bombay HC granted TDS refund with Sec 244A interest; upheld assessee's claim for refund and interest u/s 244A on TDS withheld in advance in anticipation that third instalment of technical know-how fee would have to be paid to non-resident German Company, which was subsequently waived Tata Chemicals Ltd [TS-147-SC-2014] SC allowed Sec. 244A interest to TDS deductor as 'compensation' for 'unauthorized' collection; SC upheld tax deductor's claim for interest u/s 244A on refund of excess deduction of tax at source (TAS) made pursuant to order u/s 195, which became refundable when appeal against such order was allowed by appellate authority. 8. Corpus donations not be treated as application of income in case of charitable trust It is proposed to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid out of contributions [which is Tewari Charitable Trust vs DIT[TS-6547-ITAT- 2014(MUMBAI)-O] Mumbai ITAT ruled that in order to obtain approval under section 80G(5), donation made by a charitable trust to other charitable trusts/institutions amounts to application of income within meaning of sec. Page 4

5 considered as Trust s income u/s Sec 11(1)(a)/(b)], being with specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income. It is also proposed to insert a proviso in Sec 10(23C) so as to provide similar restriction as above on the entities exempt under subclauses (iv), (v), (vi) or (via) of said clause in respect of any amount credited or paid out of their income. 9. Secondary adjustments in certain cases. Sec 92CE provides for secondary adjustments in cases where a primary adjustment to transfer price has been made in specified situations. 10. Rationalisation of provisions of Sec.10AA It is proposed to clarify that the amount of deduction referred to in Sec. 10AA shall be allowed from assessee s total income computed in accordance with the provisions of the Act before giving effect to the provisions of Sec. 10AA and deduction u/s 10AA in no case shall exceed the said total income. 11. Income from transfer of Carbon credits 11(1)(a). PMP Auto Components P. Ltd. [TS-263-ITAT- 2014(Mum)-TP] The TPO re-characterized share application money paid to Mauritian subsidiary as loan on account of delay in allotment of shares. TPO also proposed addition on account of notional interest chargeable on additional capital investment re-characterized as loan. Mumbai ITAT confirmed DRP order deleting 'secondary adjustment' with regards to notional interest, as such secondary adjustment is not permissible as per TP provisions. As assessee was sole shareholder, ITAT held that abnormal delay in share allotment was neither reasonable nor beyond control of assessee, and therefore directed TPO to compute arm's length interest payable to an unrelated party, following co-ordinate bench ruling in Bharti Airtel. Yokogawa India Ltd. [TS-661-SC-2016] SC had observed that deduction u/s 10A/10B are qua the undertaking without reference to other eligible /non-eligible units and thus the benefit is granted to the undertaking which resultantly flow to the assessee by drawing support from contemporaneous CBDT Circular 794 dated August 9, SC concluded that Sec. 10A/10B are provisions of deduction and the stage of deduction is while computing gross total income of eligible undertaking under Chapter IV of the Income-tax Act and not at the stage of computation of total income under Chapter VI. Page 5

6 It is proposed to insert a new Sec. 115BBG to provide that where the total income of the assessee includes any income from transfer of carbon credit, such income shall be taxable at the concessional rate of 10% (plus applicable surcharge and cess) on the gross amount of such income. No expenditure or allowance in respect of such income shall be allowed under the Act. SubhashKabini Power Corporation Limited [TS-236- HC-2016(KAR)] Karnataka HC held that entitlements earned on sale of carbon- credit is a capital receipt and thus not taxable. HC observed that carbon credit is not the business of the assessee nor the same is generated as a byproduct on account of business activity of power generation, but is earned on account of concern for environment, carbon credit is generated on account of employment of good and viable practices by assessee. My Home Power Ltd. [TS-820-ITAT-2012(HYD)] Hyderabad ITAT held that income from sale of carbon credits is a capital receipt and thus not taxable. ITAT noted that carbon credit not generated or created due to carrying on business but accrues due to 'world concern' and 'environmental concerns' and thus carbon credits did not have an element of profit and hence, cannot be taxed as income u/s 2(24), business receipt u/s 28, capital gain u/s 45 or income from other sources u/s 56. Indur Green Power Private Limited [TS-447-ITAT- 2015(HYD)] Hyderabad ITAT held that consideration received on sale of carbon credits constitutes a capital receipt and thus, not taxable. ITAT followed coordinate bench ruling in My Home Power Ltd, later upheld by Jurisdictional HC wherein it was held that the receipt from sale of carbon credits is in the nature of capital receipt. 12. Extension of scope of section 43D to Co-operative Banks Sec. 43D, inter-alia, provides that interest income in relation to certain categories of bad or doubtful debts received by certain institutions or banks or corporations or companies, shall be chargeable to tax in the previous year in which it is credited to its profit and loss account for that year Confirmed: Kalpataru Power Transmission Ltd [TS-141-ITAT- 2016(Ahd)] Ahmedabad ITAT held that that transfer of carbon credits is a taxable receipt. ITAT ruled that "It is clearly a benefit in the sense it entitles the assessee to transfer a right to produce more emission- which is a valuable entitlement, and it arises from carrying on of business". Confirmed : Shri MahilaSewaSahakari Bank Ltd. [TS-443-HC- 2016(GUJ)] Gujarat HC held that interest on non-performing assets ( NPA ) is not taxable on accrual basis in assessee s (a co-operative bank) hands in view of RBI norms relating to income recognition and assets classification. HC noted that in view of RBI guidelines mandate assessee couldn t recognize interest on NPA on accrual basis. Page 6

7 or actually received, whichever is earlier. It is proposed that interest will taxable on actual receipt instead of accrual basis in respect of nonperforming assets ( NPA ) accounts of all non-scheduled cooperative banks also to be treated at par with scheduled banks. Explaining the twin factors that come into play while determining tax liability, namely, income recognition and computation HC held that Insofar as income recognition is concerned, it would be the RBI Directions which would prevail in view of the provisions of section 45Q of the RBI Act and section 145 would have no role to play. Hence, the Assessing Officer has to follow the RBI Directions. The Urban Co-operative Bank Ltd [TS-13-SC-2015] SC declined to admit Revenue's SLP against Karnataka HC judgement. HC had held that interest income on NPAs was assessable only on receipt basis. HC had rejected Revenue's contention that since assessee followed mercantile system, interest income was taxable on accrual basis. 13. Exemption of income earned by political parties u/s 13A It is proposed to amend Sec. 13A to provide for additional conditions for availing the benefit of exemption by political parties, namely, (i) no donations of Rs.2000 or more is received in cash, (ii) political party furnishes return in accordance with Sec. 139(4B) on or before the due date specified therein. 14. Special provisions for computation of capital gains in case of joint development agreement ( JDA ) It is proposed to insert a new subsection (5A) in Sec. 45 so as to provide that in case of an assessee being individual / HUF, who enters into a JDA/ specified agreement, capital gains shall be chargeable as income of the Shri YashwantSahakari Bank Ltd. [TS-352-ITAT- 2014(PUN)] Pune ITAT deleted addition on account of non-accrual of interest on advances given by assessee ('a co-operative bank'). Assessee had classified advances as NPA by virtue of RBI prudential norms. ITAT held that interest income relatable to NPAs was not includible in total income on accrual basis since it did not accrue to the assessee. ITAT followed co-ordinate bench ruling in The Omega JantaSahakari Bank case. Confirmed: Common Cause [TS-5053-SC-1996-O] In this case SC held that the political parties have to file the return of income and the Government of India should appoint an enquiring body to find out why the mandatory provisions of filing of return was not followed by the political parties and why no action was taken. Chaturbhuj Kapadia [TS-1-HC-2003(BOM)] Bombay HC held that date of JDA may be construed as date of transfer if it read as a wholeindicates passing of complete control over the property. Page 7

8 previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. Stamp duty value of his share, being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration. Jasbir Singh Sarkaria[TS-14-AAR-2007-O] AAR ruled that date of execution of irrevocable power of attorney, allowing builder to take possession in part performance is relevant to decide date of transfer. C S Atwal [TS-414-HC-2015(P & H)] Punjab & Haryana HC granted relief to the taxpayer (land owner) while laying down law on interpretation of Sec 53A of Transfer of Property Act ( TOPA ) in context of definition of 'transfer' u/s 2(47). HC noted that JDA to be covered under TOPA was required to be a registered instrument for enforcing civil law rights, absent which it was not enforceable under general law and transaction would not fall u/s 2(47)(v). HC observes that clause (vi) of Sec 2(47) was not attracted as developers did not become members of the society and surrender of right to plot by member was merely to facilitate entering into JDA with developers. B.V. Kodre (HUF) [TS-595-ITAT-2011(PUN)] Pune ITAT held that no 'transfer' u/s 2(47) under 'Property development agreement' was effected in the absence of 'transfer of possession' and 'payment of full consideration' while adding that capital gains was not assessable in the year of agreement. K. Radhika [TS-533-ITAT-2011(HYD)] Hyderabad ITAT held that willingness of transferee to perform obligations u/s 53A of TOPA was essential for deciding accrual of capital gain and not the date of development agreement. DnyaneshwarMulik[TS-2-ITAT-2005(PUN)] Pune ITAT held that completion of 'transfer' of immovable property was not a requirement for applicability of Sec (2(47)(v). ITAT further ruled that transfer took place where transferor acted upon terms and conditions of the JDA. Charanjit Singh Atwal [TS-353-ITAT-2013(CHANDI)] Chandigarh ITAT ruledthat capital gains on land istaxable in the year when JDA is entered. ITAT noted Page 8

9 that JDA alongwith irrecoverable power of attorney & handing over of possession, resulted into transfer of capital asset. 15. No notional income for house property held as stock-in-trade It is proposed to amend the Sec. 23 (dealing with determination of ALV) to provide exemption to property held as stock in trade from provisions requiring the treatment of second house as deemed to be let out property. The benefit would be available for the period up to 1 year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority A.Ram Reddy] [TS-6729-ITAT-2012(HYD)- O]; Krishna Kumar D Shah (HUF) [TS-5927-ITAT- 2012(HYD)-O]; Mrs.DurdanaKhatoon [TS ITAT-2013(HYD)-O] Hyderabad ITAT ruled that the mere fact that the transferor-owner has also right to enter into the property to oversee the development work or to ensure performance of the terms of the agreement cannot restrict the rights of the transferee developer. Hence, there is a deemed transfer once the owner allows the developer a general control over the property and to make use of it for the intended purpose. Therefore, capital gains arise notwithstanding that there is Parallel possession with owner and Transferee. Input provided by Taxsutra reader, Mr. TalluriRajendra Prasad (founder member of the firm TRP & Co.) DLF LTD - [TS-5387-ITAT-2016(DELHI)-O] Delhi ITAT had held that in a situation where assessee had intention to let such properties but could not get suitable tenant, ALV will be Nil as per provision of Sec. 23(1)(c). It noted that Sec. 23(1)(a) r.w.s 23(1)(c) clearly provides that if the property remain vacant wholly or partly during the year, then actual rent received or receivable will be taken as the ALV of such properties. In the present case, the property remained vacant, therefore, it was held that the ALV of such properties was Nil and hence, no notional rent can be estimated in the case of vacant properties. VikasKeshavGarud [TS-385-ITAT-2016(PUN)] Here the Pune ITAT accepted assessee's claim for determining annual letting value ( ALV') of a commercial complex remaining vacant during AY at Nil. ITAT here had rejected Revenue's determination of gross ALV at Rs lakhs based on actual rent received for same property in earlier years. Page 9

10 Sharan Hospitality Private Limited [TS-511-ITAT- 2016(Mum)] Mumbai ITAT ruled in favour of Revenue and rejected assessee's claim for vacancy allowance u/s 23(1)(c) in respect of property which remained vacant during AY ITAT had held that vacancy allowance u/s 23(1)(c) is available only when property actually let and thus intention-to-let is irrelevant. Page 10